IRS audits raise tax law issues with many nonprofits' bonds.

WASHINGTON -- Internal Revenue Service field agents have found tax law problems with the outstanding tax-exempt bond issues of nearly all the 79 private, nonprofit organizations under audit, an IRS official said last week.

"Almost every Coordinated Examination Program audit of universities and hospitals has raised some bond" questions, said Marvin Friedlander, a branch chief in the IRS' exempt organizations division.

Friedlander told a meeting of the National Health Lawyers Association on Thursday that the problems usually involve "questions about arbitrage rebate, private business use, or failure to meet the $150 million limit" on the amount of bonds that a 501(c)(3) organization other than a hospital may have outstanding at one time.

The 79 organizations under audit include 34 health care institutions, 18 colleges and universities, and 27 other tax-exempt entities.

Friedlander said the high number of bond problems should not be surprising, since an earlier General Accounting Office report found that the service traditionally put little effort into making sure private, nonprofit organizations complied with bond rules.

Another IRS official told lawyers at the conference that they should be prepared for field agents to continue to probe bond issues during audits of 501(c)(3) organizations.

"We will be looking at bond issues ... particularly with respect to private activity or private use of bond proceeds," said T.J. Sullivan, a special assistant on health care issues. "I think you can expect that to be looked at fairly carefully, and we may be looking at arbitrage as well."

Aside from the 79 audits, under way, the IRS to date has completed 26 audits of health care institutions and universities, Sullivan said.

Among the eight audits closed in the health care area, the average proposed assessment by the IRS is $250,000, he said.

IRS officials earlier disclosed that one of the eight involved the revocation of a health care institution's tax-exempt status. On Friday, Sullivan said that the details of the case probably would be made public eventually.

In conducting their audits on health care institutions, field agents are focusing on a number of other issues in addition to bonds, Sullivan said. Those include the institution's unrelated business income, compensation arrangements for officials, and financial relationships with physicians.

During his speech, Friedlander also discussed the IRS' program for processing applications from institutions seeking 501(c)(3) status. He noted that the form institutions must file, Number 1023, was updated in 1993 to include questions about bond issuance contemplated by the institution.

Friedlander said that since those questions were added, the IRS has discovered that about 20% of the applications "raise significant concerns" related to potential issuance of tax-exempts.

Typically, applications take several months to be processed, but Friedlander said the service is very sensitive about moving quickly in cases where an institution needs to issue bonds by a certain date.

"We are very aware of timing problems," Friedlander said. "We have literally not missed any bond dates."

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